Market report

Fed's anti-inflation war switches from strategic to tactical

This word, often screamed in war movies and on golf courses, is the key term in the statement issued Thursday by Federal Reserve policymakers.

It means that for the next few weeks, at least, active investors will be even more vigilant against surprises in the normal drone of economic reports.

After raising its target interest rate for the 16th time in nearly two years, "the committee judges that some further policy firming [read: higher interest rates] may yet be needed to address inflation risks but emphasizes that the extent and timing of any such firming will depend importantly on the evolution of the economic outlook as implied by incoming information."

In announcing that it will rely on "incoming information," the Fed diminished the goal, specified in its previous statement on March 28, of guiding the way to "sustainable economic growth." Instead, reacting to "inflation risks," as posed by economic reports, is the declared objective.

Apparently, Maria Bartiromo, a CNBC markets reporter, got it right last week. She reported that Fed Chairman Ben Bernanke told her he was concerned that traders and analysts incorrectly assumed he had gone soft on inflation when he hinted recently that the Fed might pause in its rate hike campaign.

But the stock market didn't quite know what to make of the latest Fed statement. The Dow Jones industrial average fell after the Fed released the statement at midday, reversed course into positive territory, fell again and finally blipped higher to close virtually unchanged.

Keep in mind that the popular notion that stock prices rise after the Fed quits raising interest rates is not supported by historical evidence.

In fact, only four times did the Dow register a gain four months after 16 Fed rate peaks since 1920, according to Ned Davis Research. In 2000, when the last rate hike campaign ended, the Dow fell over the succeeding four- and 12-month periods.

Nonetheless, most investors had hoped for evidence that the Fed was relaxing. This hope was not fulfilled.

Uncertainty over the next Fed move--the policy committee is scheduled to meet June 28--highlights the second most important word in Wednesday's statement: "evolution."

Bernanke & Co. say they will depend on the "evolution of the economic outlook." No intelligent design here. "Evolution," as defined by Charles Darwin and his disciples, is a synonym for "chance."

Reacting to and even welcoming chance events is a different style of Fed leadership than investors had come to expect under former Chairman Alan Greenspan.

For active investors, it might be time to watch and wait, with the Fed on hiatus until late June and the latest round of quarterly financial reports nearly concluded.

If the Fed is depending on "incoming" data, you can be sure that traders and the financial press will overdramatize more than they normally do the importance of every routine economic news item.

On Wall Street, they call surprising news headlines "tape bombs." Allowing them to hit you is an easy way to weaken a long-term investment program.

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bbarnhart@tribune.com

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Tune changes on rate policy

A key change in the Fed's statements:

March 28: "Some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance."

Wednesday: "Some further policy firming may yet be needed to address inflation risks but ... the extent and timing of any such firming will depend importantly on the evolution of the economic outlook as implied by incoming data."

What this means: The Federal Reserve is keeping its options open on further interest rate increases.